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Housing – The Never Ending Story

Living in Southern California, it’s hard not to be influenced by “The Business” (movies) even if one toils in less admired or profitable ventures, like housing finance.

Were the Federal Reserve in “The Business” it’s latest publication “The U.S. Housing Market: Current Conditions and Policy Considerations” probably would have gone directly to the discount DVD racks at Target and Wal-Mart.

In reading the Fed’s whitepaper, I’m reminded of an attractive actor in a movie trailer that fails to deliver at the box office; “the REO to Rental” scene in the Fed’s whitepaper had potential, but the plot collapsed in the tired retelling of every under-inspired effort to fix housing to date.

Like late-night talk-show hosts reviewing an entertainment project, Goldman Sachs and Fitch were underwhelmed, if polite, in their comments. However, neither Cameron or Spielberg would green light this script as written, but unlike the imagined world of Hollywood, the housing issue is drama that must be addressed. We can’t keep putting this script back on the shelf and hoping Brad Pitt’s agent will find it and turn it into a light-hearted comedy.

In old-fashioned western movie style, the Fed advises bringing a loaded gun to the housing fight because there are more than a few bad guys and a conflicted sheriff (played by the GSE’s regulator) who is torn between supporting housing values while minimizing tax payers losses.

The Fed warns there is no “silver bullet” or in Fed speak “bazooka” that can re-inflate the economy or housing market to the extent it has collapsed. That a great deal of the REO inventory must be converted to investor properties is a well received plot feature, but the storyline is so complex it loses the audience’s enthusiasm in the telling.

In many ways this latest telling is a sequel to earlier projects like HARP and HAMP. Aspects of those earlier efforts point to the dangers of complexity and the management of such complexity by student film makers, otherwise known as “folks learning on the job.” Despite the investing public’s lukewarm response to those projects, the latest “REO to Rental” suffers from an absence of financing, complex script, and the need for an entourage of “A-listers” to carry the project, which is filming on location in such tough environments as Detroit, Atlanta, Riverside, etc.

Is there star making potential here? Sure. I’ve personally managed messy books-of-business like this. I know for a fact this is a workable project, in the hands of an experienced team. Presently, there are more under-employed mortgage finance people than there are out of work actors in Hollywood. The GSE REO inventory has the potential to be a “franchise” if the director can have the freedom and patience to break up the property into workable scripts. As the Fed’s paper points out, two fifths of the inventory has the potential to rent out at cap rates in the 8% range. Those are the kind of yields that make bankers cry as though they’ve won an Oscar. However, the OCC & GSE standards around REO management practices are so outdated to the times, they make the Screen Actor’s Guild work-rules enviable. Only in America can the banks and GSEs find a way to get black-listed from their own projects.

When it comes to Housing – The Horror Movie, we’re about $7 trillion (in lost equity) into this project and counting. We (the tax payers) own about 250,000 homes we need to sell or rent in a market with millions of other units ready to join the chaos at the first sign of life.

As Stephen Spielberg reminds us, “People have forgotten how to tell a story. Stories don’t have a middle or an end any more. They usually have a beginning that never stops beginning.“

We’ve seen the first five years of this drama, it’s time to put a Hollywood happy ending on this Never Ending Story.